Estate Planning, Family Provision Claims and Notional Estates

A family provision claim refers to an application for an order for provision to be made out of a deceased estate for a person’s maintenance, education and advancement in life. The Succession Act 2006 (NSW) allows the Supreme Court to make a family provision order if it considers there is inadequate provision for the applicant’s proper maintenance, education or advancement in life.

In NSW a provisions order may in addition include assets outside of the estate. The often overlooked Notional estate provisions may be relied upon by an eligible person, in certain circumstances.

If the applicant is successful, property which had conventionally been regarded as being outside of the deceased actual estate (such as real estate held in joint tenants or nominated superannuation benefits), may be designated as notional estate.

The very recent Supreme Court family provision matter of The Estate of the late Neville Wran former Premier, is a good example of the scope of the potential notional estate provisions. Mr Wran reportedly held estimated assets of close to $40 million during his life. However Mr Wran’s actual deceased estate is reported to be around $500,000. Therefore the Wran notional estate, including assets held in joint tenancy with his wife, assets gifted prior to death and property held in numerous trust and company structures would potentially capture much of the remainder of the $40 million.

What follows is an overview of Notional Estate provisions, including their purpose and conditions and minimising Estate risks.

Purpose of the Notional estate provisions

The notional estate provisions are contained in sections 74-90 of the Succession Act 2006 (NSW). They are intended to stop people from attempting to defeat or thwart potential family provisions claims by transferring or gifting property outside their actual estate prior to their death.

This enables a transfer of assets, made by the deceased with the intention of defeating a family provision claim, to be nullified and certain assets clawed back into the estate.

When may property be designated as Notional estate?

An order may designate notional estate property if the court finds that an eligible person (usually a close family member, a dependent person, or a person who was living with the deceased in a close personal relationship at the time of death), has not been adequately provided for, and if the court is satisfied there are insufficient assets in the estate for the making of the family provision order, or any order as to costs. In so doing, the Act enables the Court to make a notional estate order affecting assets that didn’t directly belong to the deceased at their date of death.

The Court’s authority to make a notional estate order is restricted. It must consider substantial justice and the merits involved, as well as avoid interference with reasonable expectations in relation to property, such as the dividing of a commercial or farming property as to make it unviable.

What property may potentially be designated as notional?

A relevant property transaction needs to have taken place. This can include any positive act or omission that directly or indirectly results in the property becoming owned by another person or subject to a trust.

Property which has been transferred or disposed of for less than full valuable consideration by the deceased at time of death, within 1 year prior to death, or 3 years prior to death with the intent of denying or limiting provision being made out of the estate may be regarded as part of the notional estate. The provisions also may capture property distributed after the deceased’s date of death by the executor. An analysis of the provisions is made in the case of Kastrounis v Foundouradakis [2012] NSWSC 264.

The Succession Act 2006 also contains deeming rules, which effectively deem the relevant property transaction to have taken place at the date of death. For example the failure to sever a joint tenancy was regarded in Cetojevic v Cetojevic [2007] NSWCA 33 as a relevant property transaction. Thus the other joint owner’s interest in the property may end up being captured into the deceased’s notional estate.

Some further examples of potential notional estate property include the gifting or transfer of assets for less than market value; the nomination of someone other than the executor life insurance payment; the nomination of a person other than the executor to receive a superannuation death benefit. The decision in Charnock v Handley [2011] NSWSC 1408 illustrates the power that the court has to make orders under the notional estate provisions affecting interests in superannuation funds. For example the failure to amend a superannuation fund deed so that the death benefit could have been paid to the applicant; failure to exercise a trust deed power of appointment. See Kelly v Deluchi [2012] NSWSC 841; Westwood v Quilty & Ors [2013] NSWSC 109.

Minimising estate challenge risk

Although family provision claims in NSW cannot be prevented absolutely; preventative estate planning strategies do exist, which, if carefully implemented, can reduce the likelihood or the prospects of success for a person making a claim against the estate:

Timing of any divesting of ownership or control of assets is important; as are

Location of assets and testator (the provisions are not in effect in other states)

Restructure of asset ownership;

Execution of carefully drafted letters of wishes, providing objective facts as to why provision has not been made;

Organising family conferences, use of binding financial agreements and release of rights documents that may be approved by the court;

Use of lifetime loan backs in order to rebut the conclusion that any gift did not take place;

The above are just some of the methods that may be considered as part of a preventative strategy to minimize estate challenge risks, depending on the circumstances.

Family Law Solicitors Sydney at Pavuk Legal can provide you with sound advice in relation to Family Provision claims, including succession; estate planning, property disputes; and application for the removal of the executor of an estate.